Reliance: Upturn ride

Reliance could benefit from the petrochemicals upswing for another 18-24 months, say analysts

Reliance is riding high on the upswing in the refining and petrochemicals cycle. In the six months till September 30. 2004, Reliance's net profit has risen 35 per cent to Rs 3,189 crore, on the back of a 24 per cent increase in turnover.

The 24 per cent increase in revenues was driven by increase in product selling prices (17 per cent), as the impact of higher volumes stood at just 7 per cent. Higher product selling prices also meant that operating margin was higher at 19.6 per cent, compared with 18.4 per cent in the year-ago period.

In the September quarter, net profit rose by 39 per cent to Rs 1,752 crore. Notably, profit of the refining division jumped 57 per cent to Rs 1,249 crore, more than double the rate at which revenues of that division grew.

This was because gross refining margin jumped 61 per cent to $8.2 a barrel, compared to $5.1 per barrel same time last year. Reliance has benefited from the widening difference between light and heavy crude from about $4 per barrel to $10 per barrel currently.

Profit in the petrochemicals segment grew 35 per cent year-on-year, driven largely by a 26 per cent improvement in sales. Profit margin of the segment rose 115 basis points to 19.6 per cent.

The improvement in profitability was aided by an increased focus on premium products, which accounted for 21 per cent of the production "" these products generate a premium of 3-14 per cent over commodity prices.

The upturn in the refining and petrochemicals cycles, which started about two quarters ago, looks set to continue for the next 18-24 months, according to analysts. If that's the case, The Reliance stock looks rather reasonable at less than 11 times estimated FY05 earnings.

IOC

Despite a 20 per cent year-on-year rise in sales and an 80 per cent jump in gross refining margins to $7.49 a barrel in the second quarter of FY04, Indian Oil Corporation's (IOC) profit for the second quarter was lower by 31 per cent year-on-year. EBITDA fell to Rs 1802 crore, a drop of 24 per cent and the EBITDA margin is down to 5.6 per cent from 8.8 per cent in Q2 last year.

The reasons for the lower profit and margins are primarily the under-recovery on account of sales of LPG and SKO (superior kerosene oil), which for the quarter stood at Rs 1578 crore compared with Rs 300 crore in the corresponding quarter of last year and Rs 1295 crore in Q1FY05.

Moreover, refining margins were below expectations because IOC's biggest refinery at Mathura, which has a capacity of 8mn tonnes, was shut for about 42 days.

Thus, the refinery's throughput was just 8.46 million tonnes last quarter compared with 9.15 million tonnes in Q2FY04. The pipeline throughput also fell by three per cent.

While the spreads between jet kerosene and crude have been better in the quarter, the margins on High Speed Diesel (HSD) and Motor spirit were also lower, since retail prices were raised late in August.

The other effect of not raising retail prices has been to force oil companies to borrow to maintain their cash flow. For IOC, this resulted in a 51 per cent jump in interest cost y-o-y to Rs 128 crore.

HDFC-the magic 30 per cent

When asked what HDFC's growth in sanctions is likely to be in the next quarter, or the quarter after that, analysts reply "30 per cent" without batting an eyelid.

That has been the rate of growth for years, and it was the rate at which sanctions grew in Q2 as well. Disbursements are up 28 per cent. Net profits rose by 22 per cent in Q2, while gross profits rose 23.7 per cent.

HDFC has been able to manage its funding costs well, thanks to bond issues and other fixed rate funds tied up in the first half. The management says that, on a marginal basis, funding costs are still lower than 6 per cent. Spreads continue at 2.2 per cent. Funding costs will be hit if interest rates go up any further, but 64 per cent of HDFC's assets are on a floating rate basis, so it does have a cushion.

The company points out that while the net interest margin on its loan portfolio has grown by 22 per cent in the first half of the year, the net interest margin on all interest earning assets is lower, because of the low returns earned on its Rs 3,810 crore net worth, which has been used in investments. The implication is that if interest rates rise, these investments will yield more.

Unrealised gains on its listed investments, including HDFC investments, amounted to Rs 2882 crore. NPAs were 1.19 per cent, compared to 1.29 per cent at the end of June. The stock has run up sharply in the last month, despite all the interest rate worries. With earnings growing by 21.5 per cent, that rally has been vindicated.

With contributions by Mobis Philipose, Amriteshwar Mathur and Shobhana Subramanian